Jill Kerby

How do you put a value on a house or apartment in a market where prices are still coming down and there are only a handful of completed sales?  

 

If the leaks from the Commission on Taxation’s report about their property tax proposal are true – and a self-assessment tax based on banded property values is implemented next year – then this is exactly the sort of dilemma that the home owners who are not exempted from the tax, will face. 

 

Much as everyone would like to think their homes are still worth what they were at the height of the boom, that is not the price you’d dare put in writing on a tax return. 

 

But without an independent, methodical, county by county, area by area, survey of the value of the nation’s housing stock to consult, do you opt instead to deduct 20%, 30% or even 50% from the price that you believed your property to be worth in 2007 before the crash began? Or do you search for that recent, singular sale in your neighbourhood of a house similar to your own, and use that price as your benchmark?

 

One mortgage broker I spoke to last week, who admits he paid far more than he should have for his house in 2006, says he will probably price his home at 2002 or 2003 levels, that is, before property prices exploded due to the huge glut of cheap finance and the loose lending conditions that fuelled the bubble. 

 

Personally, I’ve decided I’m going to use a valuation method that has traditionally been used by professional landlords to generally determine whether the asking price of a property is fair or not.  They do this by multiplying the annual rent or yield by a factor of between 12 and 14. (The better the location the higher the factor).  The sum achieved is considered fair market value because it should allows the landlord to recoup his initial investment after 12, 13 or 14 years.

 

The figure I’ve come up with on my own house, based on what these houses are renting for, produces a price that more than recoups our purchase price 15 years ago, but is a fraction of the hugely inflated prices that a few houses on my street achieved at the height of our extraordinary property boom.   

 

I’ve no idea if the Revenue will accept such a valuation.  But without strict valuation guidelines and a clear set of penalties for tax evaders, it seems like a more credible formula than the wild guesses that are being bandied about by many homeowners and estate agents these days. 

 

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A week doesn’t pass when I don’t hear from some just, or nearly retired reader who has been shocked by the value of their pension fund and the pension income they can expect. 

 

The latest story involves a 65 year old woman who worked for 15 years in a hotel and paid a small amount every week into her defined contribution pension plan.  Her contribution was so small, however, and the collapse in the value of the fund due to the stock market turmoil of the last two years. so great, that she has been left with a pension that might just pay her annual fuel bill, or perhaps the cost of taxing and insuring her little car. 

 

Her income was so low that she wasn’t even getting standard rate tax relief in recent years on her contributions and so probably shouldn’t have been making contributions in the first place. No one ever bothered to explain this to her. 

 

What bothered her the most, however, was to see how much the value of her DC pension fund had fallen in value over the last year, and even in the weeks before she retired.  She had no idea that her money, and that of her co-workers, had been invested in a fund of mainly European equities and that the pension administrator or trustees had never transferred her portion into safer assets like bonds or cash as she got closer to retirement age.

 

There is no legal requirement for pension administrators, trustees or sponsoring employers to do so.  Big self-administered funds often do so, small ones slip under everyone’s radar. 

 

There’s been a lot of pension reform talk this past year and not much action. 

 

Issues like the size of tax relief on contributions and whether lump sum payments should be taxed are now dominating discussions, but I think a more practical and helpful reform would be for pension providers – employers, life and pension companies and financial advisors – to be legally required to explain to pension members exactly how their pension works in language they can understand and as they get closer to retirement, to make sure they have a chance to shift their pension fund assets away from risky equities and into safer assets. 

 

This kind of information and the delivery of it, already exists:  A new pension administration company called Source was launched just this year by the former CEO of Hibernian Insurance Adrian Daly, that lets the member of a company pension scheme check every pension detail – the size of their contributions, the current value of their fund, the shares invested – in an on-line statement that’s very similar to the bank statements you get from a good on-line bank or mortgage. 

 

This sort of up-to-date, easy-to-access information about one’s pension may not solve all the comprehension problems people have, but it’s a sight better than the often unintelligible and limited annual statements that workers are only entitled to today. 

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It’s a common enough question in these worrisome financial times:  how safe are the Irish credit unions?  

 

Rather like with the banks, it all depends of course on which one you happen to have joined. According to Brendan Logue, the Registrar for Credit Unions in his separate report in the Financial Regulator’s annual report for 2008 (see financialregulator.ie), all is not well in the credit union movement. 

 

Of the 419 credit unions operating in 2008, just under a third of them – 133 - had high enough levels of arrears or rescheduled loans to trigger investigations by the registrar, a process that is on-going.  Ninety of them, nearly one in four, “were instructed to stop advancing any new loans for periods in excess of five years until they return to compliance with the limits set out in the [Credit Union] Act.” 

 

 

The growing level of bad debts among many unions has resulted in the registrar warning all of them “that lending for commercial property, project finance or main line business activity is not the business of credit unions and this type of lending should not be undertaken.”

 

 

Meanwhile, 76 of 101 credit unions that informed the registrar they were planning on paying a dividend in 2008 were subsequently told to reduce the size of the dividend after their books were examined.  The registrar doesn’t say how many credit unions paid dividends in 2008 but it has already been estimated that only about half did so.  This in turn has put pressure on credit unions, struggling with bad debts, as more and more members move their money to other deposit takers offering not just better returns, but any return. 

 

The registrar doesn’t name any of the 90 credit unions his office told to stop lending, despite the fact that they have serious bad debt or liquidity problems, so you will have to ask for a set of your individual credit union’s most recent accounts to get that information.   

 

But when you do, you might try to see the other elephants in the room that the regulator doesn’t mention in his report but could result in serious damage to individual unions as the recession progresses.  One in particular is the amount of unofficial residential mortgage lending that was done in the form of loans that were used as down payments for home loans at the height of the boom.  How many of those borrowers are now in negative equity or have lost their jobs?

 

The impact of the housing bust on lenders will be felt by more lenders than just the high street banks. 

 

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Health insurance is one of those consumer services that certainly hasn’t enjoyed (sic) a place in the -5.6% fall of the consumer price index rate for the year to June, as recorded by the CSO.  

 

The cost of “Health”, says the CSO, has gone up by +3.4%.   

 

If only. The cost of “health” for my family is up over 20% - the annual increase in our health insurance policy this year. And while our family’s income is down, like so many others employed in the private sector, our GP, dentist or medical consultants haven’t reduced their charges in line with the CPI.  

 

That said, the loss-making Vhi, has just announced that they’ve brought down the price of covering a child member on their three most popular Plan Bs by another €20, lowering the child member’s cost by as much as €140 since April. 

 

This is a welcome reduction for any parent paying the bill, but health insurance brokers like Jeremy Tucker of  buyhealthinsurance.ie and Dermot Goode of healthinsurancesavings.ie, who review health insurance costs for companies and individuals, describe the latest reduction as a “PR stunt” and “window dressing”. 

 

The claims record for children attending hospital “is tiny in this country”, says Tucker “and the cost to the Vhi or the other insurers is very small in their overall level of claims.”  

 

Dermot Goode says the €20 is a “token” reduction.  If the Vhi “starts reducing the cost of adult premiums”, he says, “that would be significant news.” Both also point out that even with these child premium reductions, a family of four – two parents and two children - are still better off price-wise in the equivalent plans offered by rivals Quinn Healthcare and Hibernian Vivas. 

 

The cost of health insurance is quickly reaching a tipping point, something that was always inevitable given how many people are losing their jobs. They don’t have much choice but to drop their membership, and hope they will find work soon enough in order to rejoin their insurer before the time restrictions for pre-existing conditions kick in. 

 

Anyone who is still employed, but under financial pressure can drop to a cheaper plan or to a cheaper provider – and clearly many are:  Vhi has reportedly lost 40,000 members in the past year, some of them switching to Quinn or Hibernian Vivas.  

 

Are the insurers, especially Vhi doing enough to cut their own costs?  The independent consultants are not convinced.  “If the Vhi, which says it has made a loss this past year, had to operate like any other insurer, which they do not because they are owned by the Department of Health, they’d probably be closing down some of their ancillary offices and introducing other cost cutting measures,” says Dermot Goode.  They may claim to be the most efficient private health insurance operator, “but there is no independent evidence.” 

 

Meanwhile, a professional review of your family’s existing health insurance policy will, at least, let you in on a well kept Vhi (or Quinn or Hibernian Vivas) secret – that there is nothing to stop you accessing any of the three insurer’s equivalent corporate health plans. Not only can the price of the corporate policy be lower than those sold to individuals or families, say the independent advisors, but the benefits might be superior too. 

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The financial services watchdog wants more teeth.  

 

 

In cases where he believes it would serve the public good, Joe Meade, the Ombudsman, is looking to be able to name and shame the banks, stockbroking firms, insurance and investment companies that he finds against, a power that he should have had when his office was first put on a statutory basis four years ago. 

 

 

Certainly the cases he’s highlighted from the beginning of this year supports his position, but the occasional naming and shaming of bank  that produces a particularly loathsome case of financial elder abuse (of which the Ombudsman has discovered many in the past four years), perhaps his judgements would carry even more weight in the wider financial services industry if there was some provision to make the individuals who have sold the products – or their managers and higher executives– personally responsible for their actions.  

 

 

This could vary from fines, suspensions, demotions and dismissal to prosecutions instigated by the Financial Regulator on behalf of the Ombudsman.  

 

 

The three cases involving elderly investors that Joe Meade settled in the first half of this year and highlighted in his report last week, are extreme examples of the way elderly bank customers in particular are targeted by the investment side of the banks – who else has hundreds of thousands of euro sitting on deposit?  But Meade clearly thinks they are also only the tip of the iceberg of poor to bad advice this age group may be receiving and he also wants the institutions to be required to review all such cases involving older depositors in particular which can then be examined properly after the new joint regulatory body is created later this year. 

 

 

I hope I’m not doing the Ombudsman a disservice by saying that whenever I talk to him I get the impression that he is genuinely disgusted by the cavalier attitude that the banks and investment firms have, not just to their financially unsophisticated, elderly clients, but to the regulations under which they are obliged to operate.  

 

 

 

The purpose of confirming a customer’s age, risk profile and previous financial history (ie, whether they have ever owned shares, etc.) – all part of the required sales process - is to help guide the advisor against, for example, selling a physically frail couple in their mid-80s, with life savings of €300,000, a six year investment bond that carried stiff early encashment penalties. 

 

 

I have an elderly spaniel with more common sense than that displayed by the advisors being admonished by the Ombudsman.   (Of course, Monty’s rewards for good behaviour don’t include great big juicy commissions.) 

 

 

All the Financial Ombudsman’s quarterly reports and case studies are available on his website:  www.financialombudsman.ie.

 

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Meanwhile, interesting news from the UK:  from 2012, their financial regulator intends that sales commission for independent financial advisors will be scrapped and replaced by a fee only remuneration system.  We inevitably follow the UK lead in this area, but why wait for it to happen there first?

 

 

The merits of paying a fee over commission is that an advisor who is paid directly by his client and not the product provider is more likely do the right thing and recommend the most suitable product, not the one that pays him the highest, often on-going, financial reward.  

 

 

Only a small minority of financial advisors here charge fees, mainly to higher net worth clients who are already accustomed to paying for independent accountancy, tax or legal advice.  It’s only partly due to the commission system; which encourages the quick, lazy solution; it’s also because only a small minority have the training and expertise to provide the level of information and advice that commands a professional fee. 

 

 

Aside from the fact that expensive commissions have disproportionately impacted on the value of common purchases like whole of life assurance policies, education savings plans, AVCs and endowment mortgages over the years, the other, compelling reason we should adopt fee-only remuneration is that easy lure of high commissions are undoubtedly at the heart of the financial horror stories the Financial Ombudsman keeps unearthing that involve elderly investors.

 

 

There’s no such thing as “free” financial advice. Fee-only remuneration here can’t come soon enough.  

 

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As you might expect, nine out of 10 women participating in a Standard Life survey about the recession, say they’ve been affected, with two thirds of them cutting back on day to day spending, more than a quarter having seen their pay cut and nearly 20% having their hours reduced.  

 

Even with their incomes cut, more women are saving than ever before – €282 a month on average with eight of ten Dublin women surveyed saving €320 a month.  

 

This is all very good news for Standard Life and other pension companies keen to hoover up all these extra savings. Gillian Ryan, an account manager at Standard Life even says that she was pleasantly surprised, that it was younger women, the 25 to 34 year olds, who expressed the most interest in investing some of their savings in a pension: “You’d expect older women to be the most favourably inclined towards pensions given their proximity to retirement and the generous tax reliefs available.”

 

I’m not surprised.  Older women who’ve been investing, for example, in managed pension funds for the last decade, have earned a measly 0.6% per annum average return. Perhaps no one mentioned this to Ms Ryan and those 24 to 34 year olds.

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Now that Professor Morgan Kelly of UCD’s earlier prediction that Irish house prices could fall by 75% - 80% before bottoming out appears to be on course, perhaps we should get the debate started on what should be done for the hundreds of thousands of homeowners with negative equity and increasingly, with negative incomes. 

 

The latest Daft.ie survey shows that property prices (albeit on a tiny number of transfers) has fallen in the first quarter of this year by 8.5%. If this pace keeps prices could drop by in 2009 on top of the approximately 25% fall  Daft say they’ve fallen since the start of 2008.  

 

With billions of euro already borrowed to bail out the insolvent property developers will there going to be any money left over to bail out defaulting, insolvent homeowners?

 

Early this year, when the prospect of mass defaulters didn’t seem very imminent, but some politicians were nevertheless bleating on about how young people who jumped into the red-hot property market were innocent victims of unscrupulous lenders, I wrote that the moral hazard risk of a taxpayer bail-out should be enough to dismiss the very idea. 

 

Why would anyone, (I wrote), struggling with a huge mortgage in a falling market, keep making their repayments if they knew the government was willing to step in to bail out the next door neighbour whose financial position was perhaps only slightly worse than their own?

 

Well, that was long before Nama.  A ‘great recession’ has turned into a full-bodied depression, and anyone who still thinks they see ‘green shoots’ in America or Europe is clearly unaware that California, the 8th largest economy in the world, is now paying its bills with paper IOUs (something the USA is also doing, only with paper known as ‘dollars’.) 

Wages and other asset values are in a downward spiral everywhere in the west –and as jobs keep disappearing, so does the ability of people to not just pay off their existing debts but to take on more debt, the warped cornerstone of modern economic “growth”.  

 

In the Irish context, there isn’t a hope in hell that first-time mortgage holders, with no equity and diminishing earning capacity, are ever going to be able to realistically repay their four or five hundred thousand euro property debts.

 

Like the multi-billion euro debt yoke the country has inherited from the developers, the one that’s weighing down young workers is also going to have to be partly shifted if this economy is to ever recover. 

 

The government has committed generations of taxpayers to the great property bailout and it now looks inevitable that the number of defaulting homeowners is going to get bigger as unemployment benefits run out; we need to consider whether Nama should be expanded to include the insolvent private residential sector. 

 

And as for moral hazard, well, we’re so far down that road already, it hardly bears worrying about anymore. 

 

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Dublin has some way to go before we reach our proper, ‘mean’ position on the table of the world’s most expensive cities.  We’ve dropped from number 16 last year to number 25 today, according to the annual Mercer Consultants survey, but we’re still only a few places behind Dubai, at number 20 and just above Abu Dhabi at number 26. 

 

And just like those two, property-fuelled bubbles in the middle east, where tens of thousands of “investors”  completely lost their reason in their mad scramble to buy overpriced bricks and mortar, we will also no doubt end up at the middling to lower end of this notorious price register in a couple more years.

 

It can’t happen soon enough.  There never was any credible reason, except that we’d been caught up in a cheap credit-fuelled bubble, why Dublin should have ever cost as much to live in as Tokyo, New York or London where millions of people compete for scarce living resources in cramped geographic areas.  

Cities go up and down this index like yo-yos,  mainly due to exchange rate volatility against the US dollar, but by any criteria Dublin is not in the same league as New York or Moscow or Beijing and if gauged by the quality of life (and housing, transportation and even entertainment) Dublin doesn’t rank all that well besides the likes of Sydney (at number 66); Toronto (at 85), Montreal (103rd) or even Buenos Aries (112th). 

 

It’s just as well we’ve falling off this particular perch. Over recent years, a depleting number of Canadian friends and family could never understand how Dublin merchants could justify charging them London or Paris prices.  A nice low future ranking is a sure fire way of bringing them back. 

 

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When a charity is spending a million euro a week, you don’t look even a bank gift horse in the mouth. I am told the €18,000 in sponsorship and donations raised by the first annual NIB Irish/Danish soccer tournament last month was much appreciated by the Society of St Vincent de Paul.

 

The V de P is the country’s largest domestic charity and like many others, is struggling to meet the increasing requests for help as unemployment skyrockets and wages fall in households that still have big mortgages and other bills to pay. 

 

Since none of us know when we might need help, if you haven’t done so already and still have an income, now’s the time to discover your charitable gene. 

 

Meanwhile, a nice gesture by all the banks would be to exempt charity direct debits from any bank charges, especially since they’re currently raising their credit card interest rates and penalties.

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Unlike the households of Ireland, the government believes there is no urgency in cutting its cloth to suit its measure:  according to the Taoiseach, the long awaited An Bord Snip Nua report is only going to be considered by the Cabinet ‘sometime later this month and then debated by the Dail when they get back from their long summer holiday next September.

 

Families everywhere have been slashing their budgets since our economic tsunami hit last autumn.  Now, despite all the uncertainty about unemployment, higher income taxes and the dreaded property tax in the next budget, we’ve been given the entire summer as well over which to fret about what might be in the An Bord Snip Nua report. 

 

One cut that is likely, and will affect every family with children, will be the universal child benefit, currently paid to 600,000 – mainly – mothers at a total cost of €2.5 billion. 

 

The first two children (via the parent) receives €166 a month and the third and subsequent child, €203. The parent with three children therefore receives €535 a month or €6,420 a year, tax-free.  If they earned this money gross and were in the tax net – a possible recommendation -  they’d be paying either €107 a month or €1,284 at the standard 20% rate, or €219.35 a month or €2,633.20 per annum at the marginal, 41% tax rate.  

 

In a tiny country like Ireland, means testing or taxing child benefit should have been in place from the start. But politicians love to be loved, and a universal child benefit is a way to look like you’re doing something for the children of the nation, even if what you are really doing is trying to buy their parent’s vote. (Especially if you increase the benefit by 266% between 2000 and 2009.)  

 

A €6,420 untaxed child benefit for a parent of three is a pretty substantial bribe, whether you’re  living entirely on social welfare benefits or earning a typical middle class income of €50,000 or €60,000.  The only constituency that didn’t benefit at all of course, were the childless, who I expect are watching to see An Bord Snip’s comments about CB with great interest. 

 

If they recommend taxing the benefit at either the standard 20% rate for all, which would return it to 2004 levels, or at the parent’s highest rate (41%), it’s going to be a major administrative headache for the overstretched staff of the DSFA who will have to identify those parents who qualify and those who are exempt and for employers and the Revenue who will have to collect and implement the tax.  

 

Ditto for means testing: at what income does a parent – mother only or both parents – not qualify for the payment? Is it gross or net income?  Does the number of children in the family influence the income threshold?  What about the size of a mortgage or rent and other outgoings?

 

Had the snippers asked me, I would have told them to recommend abolishing CB altogether and redirect the appropriate €2.9 billion to the growing number of parents who are not in a position to properly feed, clothe and educate their children and hand back the rest to everyone on the tax-rolls up to last year and who are in a far better position to spend their refund more wisely than this government (that wants to keep giving billions to insolvent banks and property developers.) 

 

Too simple?  Perhaps.  Brutal?  Yes, that too.  But this is an economic depression we’re caught in, not some typical business-cycle recession that can be tweaked away with a little monetary adjustment here and a bit of token cutting there.  Nor do I believe the vast majority of working parents, who know too well what trouble we are in, would dump their children on the side of the M50 if their universal benefit was abolished. 

 

Dumping the politicians, on the other hand, who still don’t get it, is another matter. 

 

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If last week’s heated debate on RTE’s Liveline about the application of the token €200 second home tax to mobile holiday homes is anything to go by, the battle-lines are already being drawn up over the introduction of the wider property tax next December.

Callers were furious that their modest, impermanent, summer dwellings, on which they already pay fees to the site owners where they are lodged, attract the tax. Many described it as a disproportionate tax for holidaying at home. Given that the airport travel tax is just €10, they have a point. 

 

But what was also upsetting a number of them, is the thought that their mobile homes, if they are lumped in with all holiday homes, will get caught up in the new property tax.

 

Most countries with a property tax don’t differentiate between family homes and holiday homes; both use local services and both attract the marketable rate or tax.  Usually, because it may be smaller and outside the expensive urban area, the holiday home attracts a lower tax rate, but when the starting point is just €200 a year to begin with, these mobile home owners may have very good reason to worry. 

 

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Life insurance sales are up by 20% this year, say Citadel, a financial services network and coverage now averages €300,000.

 

I’m surprised that the amount is that high – so many people underestimate how much money their families would need to replace a bread-winner’s earnings – but the higher sales, says Citadel reflects not just how people become more conservative about their finances during a recession but also how they often use a recession as a reason to review their financial position.  

 

Life insurance is often a benefit that disappears when you lose your job.  Another reason to make sure you have some affordable cover right now. 

 

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There has been a significant deterioration in the solvency of defined benefit schemes; over 200 construction firms that haven’t forwarded their worker’s contributions to their industry pension scheme are being investigated and some serious investment mistakes have been made by too many scheme trustee, the Pensions Board reported last week.  

 

Oh, and the Pensions Green Paper – which has been gestating now for four years – is still languishing somewhere at the bottom of the Cabinet’s in-tray. 

 

The Green Paper should have turned into legislation long before now:  and numerous deadlines have come and gone. But there is now growing concern that one of the most crucial, driving factors in the pension system – the €2.9 billion tax relief on annual pension contributions and/or the tax free element of matured pension funds, will be targeted by the Commission on Taxation in its upcoming report. 

 

Get the tax relief element wrong, say pension experts, and it is probably fair to say that the entire review procedure, which began at the instigation of the late Seamus Brennan in 2005 when he was Minister, may have to begin afresh. 

 

 

Pensions reform is a complicated, massive undertaking but we are inordinately slow in this country in taking necessary action.  (The previous major pension reform began in the early in the early 1990s took over six years for it to become legislation.) 

 

 

Meanwhile, as a result of the economic crisis of the past year, and the impact this had had on underfunded pension schemes, the Minister for Social and Family Affairs and the Pensions Board have recently introduced piecemeal, emergency changes to the pension funding standard and to the treatment of insolvent pension funds; these too, say pension consultants, could overtake some of the recommendations made in the Green Paper and the subsequent National Pension Review. 

 

 

But it will be the government’s decision about tax relief that holds the key to the long term future of private pensions, say consultants. If it is reduced to the standard rate only, where is the incentive for someone paying the higher, marginal tax rate?  

 

Today, whatever about the poor investment performance of your pension fund, or the funding problems that your employer may have experienced, at least there was only going to be single tax liability – and then, only on the retirement income itself. 

 

 

The nearly three billion euro that the government has foregone from pension contribution relief is money that is now being borrowed just to meet payroll costs and keep the lights burning in Dail Eireann.   

 

 

In light of this, the only pension reform you should count on over the short term is the kind you end up doing yourself. 

 

 

 

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Officials at the two genuinely private health insurance companies here, Quinn- Heathcare and Hibernian Aviva Health, say they are deeply disappointed that the EU Competition Commission has upheld the €160 and €53 levy on all adult and child members in order to subsidise the VHI and its disproportionate number of older members. 

 

This risk equalisation measure-by-stealth, as one official calls it  (last year the Supreme Court threw out risk equalisation payments as defined by the Department of Health), means that the government is off the hook from having to reform the VHI, say its critics.  The wholly owned state insurer continues to operate outside the normal solvency rules that Quinn and Hibernian Aviva must trade under, and the levy is going to further discourage any further competition within the market, they say.  

 

The long and short of it is that so long as the VHI continues to have the legacy costs from the days when it was a monopoly, and that will continue so long as its very first members from the 1960s keep ageing, everyone with health insurance will have to make a sizeable annual contribution to keep the VHI in business.

 

Quinn and Hibernian, who were not consulted over the levy, say there is now no incentive for VHI to manage its costs more efficiently, and as all the health insurers lose members due to the recession, there’s a real risk that the VHI’s legacy costs will keep rising: older members have more incentive to keep their membership than younger ones or families whose state of health is better but whose incomes are under a greater strain. 

 

 

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Having already been the victim of electronic bank fraud I’ve become extra wary about the way I conduct electronic banking transactions or pass on my bank details, especially to on-line retailers.  

 

A year ago last January, over €4,700 was spent, on-line, on my current account debit card in the space of a week.  My debit card account number was generated randomly by a savvy cyberspace gang and then matched – by chance - to my bank’s ID code, which is public information.  Bingo! 

 

The fraud happened because the crooks know how to break through the banks’ electronic bars. Worldwide, a lot more money goes missing now using the new electronic break and entry methods than the old fashioned, real-time, sawn off shotgun and balaclava way.   

 

This is why I don’t have a lot of sympathy for IPSO, the Irish banks’ payment services organization, who have complained in their latest report that we are very slow here in Ireland to embrace electronic payment and transfer and are stubbornly attached to trading with cash. 

 

Also, perhaps they need to have a little chat with a few of the 70,000 Bord Gais customers – me again – whose bank details are now in the hands of the thieves who stole unencrypted Bord Gais laptops. 

 

They may not have been very cost effective, but ‘hard copy’ bank accounts certainly felt a lot safer. 

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We may be cutting back on overseas holidays this summer, but independent travel is clearly not going to disappear. 

 

Yet according to a survey done by the VHI, one of the biggest sellers of travel insurance in the country, 50% of travellers don’t bother with travel insurance.  For those that do, but opt for the cheapest premium, often from an on-line provider, it could end up as a very expensive mistake if they don’t bother to read all the terms and conditions. 

 

“Those questioned weren’t made aware that if they or a family member were taking prescribed medicine for a condition, that they might not be covered for that illness, and 39% weren’t made aware that if they or a family member had any existing or previous illness that they might not be covered for this.”  

 

More than eight out of ten respondents admitted that they were only interested in the amount of cover they’d receive for unexpected medical emergencies and illnesses.  Only 8% inquired about the breadth of overall cover. 

 

A quick review of the Financial Ombudsman’s reports shows just how badly you can get caught out by not looking out for exclusion clauses. One case the Ombudsman did not uphold last year involved a  €4,000 claim for cash and personal items that were stolen from an Irish traveller in South America.  That contract required the claimant produce receipts or some other proof that the items stolen actually existed.  

 

How many of us know to keep receipts – or even take photographs of the jewellery, cameras, laptops or expensive clothes we might travel with? In the case of another unsuccessful claimant, whose personal effects were subsequently stolen by a woman he’d met and entertained in his hotel room in the far east, the insurer required that the policy holder be vigilant in safekeeping their personal affects.  He obviously didn’t read that part of his contract.

 

The moral of the survey?  Aside from being a bit more particular about who you invite back to your hotel room and always keeping receipts of valuable objects, you should buy your travel policy from a broker or company you know and trust and then perhaps ask them to go through it with you. 

 

Ends

 

When I read about the small traders in Dublin and other cities who have lost significant business in this recession and are now caught up in upward-only rent reviews that could force them out of business, my sympathies tend to side with the traders against the banks or pension funds that own their premises.  

 

 

These are the same fund managers that didn’t necessarily do a very good job managing their clients money even during the boom years. 

 

 

I’m now left wondering about the tactics they’re employing, demanding massive rent increases when clearly the turnover is not there.  How can driving the merchants out of business enhance my pension fund performance? 

 

Last weekend the owner of Dunne & Crescenzi, one of my favourite Italian restaurants, was given a very sympathetic hearing on the Marian Finucane show. She explained how the rent on one of the units she occupies on South Frederick Street has more than doubled.  The restaurant is just as busy, she said, but customers are spending less and her turnover is down significantly. 

 

 

Bank of Ireland Asset Managers, her landlord, weren’t on the show, but other fund managers are defending themselves against charges that they are heartless, capitalist b*****ds intent on squeezing every last drop of extra rent from plucky little shopkeepers. 

 

 

They say their mandate is to get the best returns for their clients who are often ordinary people saving for their retirements. They say that the UK and Ireland are unusual in that unlike other places (like the USA) where short leases and annual or bi-annual rent reviews are more common, here, long 20 or 30 leases in city centre neighbourhoods mean that there can be significant capital gain for the lease holder.  Fortunes can, and have been made selling them on, but the tradeoff is a five year, upward-only rent review. 

 

 

The problem now is that the economic downturn makes even a 2004 level rent unaffordable, let alone one that is due a sizeable hike. 

 

 

The fund managers say they now have to decide whether it’s in the interest of the actual owners of the property – the pension fund members, for example – to leave a premises as a particular retail unit that might get hammered by the recession, or attract in a new business that can pay the higher rent.  They may even decide to redevelop smaller units into a bigger one or entirely change the use to office or residential accommodation. 

 

I hope it doesn’t come to that with any of the shopkeepers I know in the Grafton Street area who are struggling with these high rent demands. 

 

Who wants to live in a city where all the restaurants and cafes and little shops have been closed down and replaced by soulless office space?  Nor do I, as a pension fund investor fancy being used as the scapegoat for fund managers who haven’t much credibility anyway, and who produced rotten ‘managed’ fund results even when the economy was booming.

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All eyes are still on the insolvent banks, but come September, it might be advisable for anyone concerned with the country’s troubled credit unions to shift some attention in their direction. 

 

September is the start of the reporting season for the 508 affiliated members of the League of Credit Unions and there is growing concern at the number – perhaps as many as half – which are not paying any dividends to savers this year. The size of the bad loans the unions may be carrying is also a worry given rising unemployment. According to its 2008 annual report, loans account for 50.7% of the combined €13.9 billion worth of assets held by credit unions. (€11.9 billion is savings). If even 7% of these loans have turned bad – as some sources are suggesting - it would nearly amount to the entire savings protection scheme worth about €100 million the League operates to cover insolvency risks. 

 

Earlier this year about 20 credit unions were told to stop lending by the Regulator but the public has not been told which CU’s are on this list.  Rumours naturally abounded with the inevitable run on deposits and hasty statements of reassurance issued by the union officers. 

 

The risks are threefold:  bad loans, especially the commercial development loans that some larger credit unions unwisely extended; bad investment decisions, some of which have been highlighted by the Financial Ombudsman in his annual report; and, unfortunately, the continuing voluntary nature of the credit union movement.  

 

The lack of expertise is a problem mainly for the smaller unions, but organizations run by members on a voluntary or part-time basis are often vulnerable to social pressure or being hijacked by cliques of activists or the disenchanted. It doesn’t just happen at credit union level; just look at the mess that developed at board level at the nation’s building societies where the members who, theoretically, own the institutions, have hardly covered themselves in glory in the choice of the people they’ve elected to represent their interests. 

 

In their 2008 annual report, the ILCU boasted about how credit growth increased “substantially in excess of market averages” over the year but conceded that “the general economic downturn, which has caused a near universal fall in investment values will have a negative impact on credit union dividends in the year ahead” and at current market values… “will have an impact on individual credit unions.”  

 

The League insists that it is “overall…well constructed and positioned to withstand much of what is currently threatening the stability and viability of the banking sector.”

 

If that is the case, they are the only financial sector in the entire western world to have pulled that off that achievement.   We’ll know for sure come September. 

 

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It annoys me how lenders cheerfully allow consumers to think that somehow payment protection and income protection insurance are somehow interchangeable and equally valid. 

 

The former is a grossly overvalued, expensive, commission-burdened contract that mortgages, car loans and credit cards lenders try to frighten or bully their customers into buying; the latter is a much undervalued protection policy that has saved many a family from penury when a breadwinner has fallen ill and can no longer work to support them. 

 

This week, Irish Life, who mainly shares this market with Friends First, has re-priced and repositioned its income protection product to take into account our falling incomes and higher tax rate:  premiums have been lowered by 5% and 15%, it says. 

 

Meanwhile, someone in the Regulator’s office – again - needs to challenge the way payment protection is marketed, especially the implied suggestion that somehow buying a policy that costs you up to €6 for every €100 worth of your monthly mortgage repayment, is “good” value. 

 

This insurance has already been the subject of some pretty scathing reports by both the Irish and UK regulators, and anyone selling it should be required to prominently display on all advertisements and at point of sale that it only pays off the mortgage, car loan or credit card for a year and only if you’ve been lucky enough to dodge all the restricted clauses and the sneaky, small print. 

 

If you’re worried about becoming unemployed, cut up your credit card now and start filling up a savings account as quickly as you can.  If you’ve got a family to support and substantial overheads, buy a genuine income protection policy – it will cover 75% of your income up to retirement age if needs be and the premiums are still tax deductible.  

Ends

 

 

I know that a lot of people are deeply concerned about their investments and in spite of the 12 week stock market rally many (including yours truly) are deeply nervous about its sustainability.  

 

Should you cut your remaining losses now or hold on for a longer recovery?  Should you put all your money in cash?  Or buy into one of the increasing number of capital guaranteed investment funds that are being launched by the banks and life companies?

 

I’m all in favour of protecting what little wealth any of us still have, but why would anyone lock up their savings for nearly four or six years in a stock market tracker bond when there is no sign that unemployment or the house price collapse has ended, that crippling personal debt has been paid off, that corporate earnings are up, or that healthy bank lending has resumed? 

 

All of these features will need to be back in place before anyone should expect a decent return – say, one that beats deposit rates by two or three percent – from a derivative based stock market tracker that must also reward a string of middle men before you see a red cent of profit. 

 

If you really want to safeguard your capital, find a safe deposit home for the bulk of it, and then take a risk with the remaining portion by investing in an asset that you hope will both outperform the tax and inflation drag on the capital.   If you think (like I do) that inflation is the biggest risk coming down the line, buy some gold. 

 

Meanwhile, I’m told that a relatively low cost, inflation-linked bond fund and a gold based one, is soon to be launched by a leading assurance company.  Whatever they come up with, it surely can’t be as tired as the stock market tracker model that’s still being flogged.

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With Irish bankruptcy proceedings hopelessly complicated and expensive and no formal voluntary insolvency arrangement in place like they have in the UK, preventative measures have always been the way to proceed here in Ireland when someone gets mired in debt. 

 

From the end of September next, a new protocol between the banks and MABS, the state funded, money advice and budgeting service will be launched with two aims – the setting up of a partnership approach between creditors and MABS and then following a five step plan that will result in a mutually acceptable, affordable, sustainable, repayment plan that keeps everyone out of the courts. 

 

So far so good; however, it could come a little unstuck when some creditors, who must “ensure that their door is always open to customers who may find themselves in financial difficulty” find that no matter how willing in principal they are to help their debtors cope with this downturn, in reality if it comes to a ‘them or us’ conflict of interest, there might not be the satisfactory ending that this protocol seems to anticipate.

 

September seems a long way off for anyone currently struggling with serious debts or who hiding from their bank. You might want to get onto the protocol queue as soon as you can by speaking to a MABS advisor now.  A copy of the IBF/MABS Operational Protocol: Working Together to Manage Debt can be downloaded at www.ibf.ie

 

Ends

 

We should know next month what tax changes to personal pensions are recommended by the Commission on Taxation, but pension consultants are expecting the worst - that the tax-free lump sum, worth 25% of a pension fund in the case of the self-employed or director’s pensions and the equivalent of one and half times final salary for employees in occupational schemes, will end up being taxed, perhaps the 17.5% figure that was leaked by government sources around the time of the April mini-budget. 

 

For someone with a million euro pension fund, this tax raid means a potential loss of €43,750.  If such a recommendation is made, pension consultants expect a rush of interest by the self-employed and company directors who are over age 50 out of their Retirement Annuity Contracts and executive pensions into more flexible PRSAs. 

 

John Mulholland of Dublin pension consultants Custom House Capital says that redundant employees and executives are also “quite sensibly” opting for the PRSA solution, since it doesn’t stop them looking for, or working in a new job even after they collect their PRSA lump sum and pension. 

 

ends

 

Early this year, at a personal finance seminar I was giving, a woman rounded on me for my apparent lack of sympathy for first time buyers who were now stuck with enormous mortgages and negative equity.  

 

She thought it was unfair of me not to jump on her bandwagon and demand that the government – “who are bailing out the bankers” - force these same bankers “to do something” to alleviate the financial and emotional stress her son was under in trying to meet the repayments on his “bachelor apartment”.  

 

Interest rates were still a couple percentage points higher then than they are now, so this mammy’s boy was probably paying at least 2%-3% more interest than he is now. But it was the fall in the market price of his house that she was also concerned about:  “It was the banks lending too much money that caused prices to rise, but now that they’ve crashed he’s stuck with a mortgage that’s worth more than the apartment,” she lamented.  His bank “forced” this money on him, she insisted, and so should be forced to share his “loss” of equity. 

 

Sadly, it doesn’t work that way. But since January the sharp fall in interest rates has reduced the unfortunate man-child’s mortgage by at least a few hundred euro a month, but house prices have fallen a further 6%-8% since January, so he still deeply in negative equity. 

 

Which is why I thought that a survey last week showing how 80% of mortgage applications are being rejected by the banks was such encouraging news, at least for the newest crop of first time buyers.  

 

The mortgage lenders are now doing what they should always have been doing: they are not just checking out the applicant’s job security, their credit record and future earning prospects, but also whether the property itself is a good risk. And with record inventories of brand new units unsold, and prices still falling at a pretty shocking rate every month, is it any wonder that the banks are demanding larger deposits and stricter repayment terms? 

 

The biggest reason that loans are being turned down – with a 45% rejection rate - is the person’s inability to meet long term repayments, says Select Finance Group, the broker consultancy that conducted the research.  It doesn’t say whether this is due to the lender’s concern about unemployment or the inevitability of rising interest rates.  I suspect it’s probably both.   

 

Select Finance’s conclusion is perfectly clear:  if you want a mortgage loan in this market you better prepare a personal mortgage plan with ‘wow’ factor – as in, “Wow, this person looks like their job is secure…and they’ve got a 20% deposit too!”

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Now that the effect of the health and income levies on our paycheques has finally sunk in, anyone who owns a pension or life insurance or assurance policy – the kind you contribute to for your children’s long term education costs – might like to know that they’re about to mugged on this front too. 

 

Tucked into the Minister’s budget speech last April was an additional levy – just 1% - on all life insurance and pension contract premium contributions.  (He also increased the existing general insurance levy from 2% to 3%.)

 

The implementation of the new life levy has been delayed until August 1st, but if it isn’t withdrawn or amended, I think it’s fair to say that the insurance and pension companies won’t absorb it themselves; they’ll pass it on to you and me. 

 

In other words, for every, €100 a month that you pay into a life assurance savings plan, or for every €500 a month you might be putting into a private pension, PRSA or AVC, the government will now expect to receive €12 and €60 respectively from your contribution. Every year. And that’s before all the other policy fees and charges. 

 

But this new levy is not a once-off event. It applies to all premiums and a very unlucky pension holder, could end up not just paying the levy on substantial premiums over the course of a year, but in they event they needed to transfer their pension to a new employer, to a buy-out bond or PRSA or use it to buy a retirement annuity or ARF (an approved retirement fund), the entire single premium value of the fund would be subject to the levy:  a €250,000 fund would now be €2,500 lighter; a million euro pension fund would be relieved of €10,000. 

 

The Irish Insurance Federation has pointed out how unfair this is, as is the fact that it does not apply – for some unknown reason - to self administered pensions used by high net worth investors or larger occupational schemes.  It also violates the fixed limits on charges that apply to PRSAs.

 

If the government insists on the levy, the least it should do, says the insurers, is to impose the 1% on all investment funds under management instead of individual premium payments. One pension company executive told me the levy on individual customer’s premiums will cost the firm €1.5 million to adapt their existing software package – a cost they will be forced to pass on. 

 

“The Pensions Board, which is already funded to the tune of 0.5% of pension premiums from all providers,” he said, “could simply add 1% to their bill which the Board would then pass onto the Exchequer. The life companies could simply send 1% of all life insurance premiums they take in and investment funds under management.” 

 

Bad tax policies that are formulated under pressure, and on the back of an envelope, are a speciality of this government.  

 

But this levy is just another nail in the coffin of private pensions, already hammered by high costs and charges, poor asset selection, the clawing back of tax incentives and our propensity to live longer. 

 

Ends

 

The Financial Services Consultative Consumer Panel, in its report ‘Perspective of the Consumer Panel on the Current Financial Regulatory Framework 2009’  has now added its two cent worth of criticism to all the other well-deserved abuse that’s been heaped upon of the Financial Regulator over the past year. 

 

It blames the Regulator’s “failure to act” for the worst of the financial downturn here, and especially its failure to control the property market bubble, the high-risk lending game that the banks were playing and the poor general standard of governance in the banking sector. 

 

The Consumer Panel has no authority or power so its conclusions and recommendations which in places read like an indignant charge sheet laid against an unpopular school principal by a student council, has probably already been filed away on some high shelf on Dame Street.  

 

However, in spite of the wooly thinking, if we are ever to seen an improvement in the dysfunctional Regulator and Central Bank, some of the Panel’s more fundamental suggestions should be adopted. 

 

For example, they think if would be a good idea to widen the talent pool and no longer require that all senior staff in the Financial Regulator be recruited exclusively within the public service.  This might help to “limit political meddling” and help recruit staff who have a “proven track record of independent judgement”.  Under the existing system, the Panel points out helpfully, “The Minister for Finance may have previously been their boss and this could give rise to a conflict of interest.”

 

 

The Panel also wants a more transparent and independent selection process for appointments to the Regulator’s own board – i.e.  no more overlapping of board members between the Regulator and the Central Bank. They also think it would be a good idea introduce “independent inspection” of the Regulator in the event of a charge of “wrong doing”. Amending the legislation that “prohibits the disclosure of confidential information concerning ‘any matter arising in connection with the performance of the functions of the [Central] Bank or the exercise of its powers’” would also be a good idea in its view. 

 

That these things don’t happen already will be an eye-opener for anyone who may have naively assumed that such good governance would be automatic. If you fancy yet reading yet another denunciation of poor practices in a state agency the report is on-line at www.financialregulator.ie 

 

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